Karen,an accrual basis taxpayer,sold goods in December 2015 for $20,000.The customer was unable to pay cash.So the customer gave Karen a note for $20,000 that was payable in April 2016.The note bore interest at the Federal rate.The fair market value of the note at the end of 2015 was $18,000.Karen collected $20,500 from the customer in April 2015,$20,000 principal plus $500 interest.Under the accrual method,Karen must recognize income of:

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Under the accrual method, Karen must recognize income in the year in which it is earned, regardless of when payment is received. In this case, Karen sold goods for $20,000 in December 2015, which is when the income was earned. The fact that the customer gave Karen a note for payment does not affect when the income is recognized. The fair market value of the note at the end of 2015, which was $18,000, is not relevant for tax purposes. When Karen collected $20,500 in April 2016, $20,000 of that amount represents the principal and $500 represents interest income. Therefore, Karen must recognize $20,000 of income in 2015 and $500 of interest income in 2016.

Karen,an Accrual Basis Taxpayer,sold Goods in December 2015 for $20,000